Booming fairness markets and high-flying Chinese language tech shares — a lot of which cratered this yr — had been main contributors to that breakneck progress. Nevertheless it was additionally fueled by a device that enterprise corporations are likely to keep away from: debt.
Specifically, Tiger relied on a type of borrowing known as net-asset-value financing, through which its present stakes in carefully held tech firms function the principle collateral. With whole excellent NAV loans rising to about $4 billion final yr, the agency’s long-time lender, JPMorgan Chase & Co., introduced in additional banks to assist shoulder the elevated demand, in keeping with individuals with data of the financing.
Traditionally, VC fund managers have eschewed debt, which can be laborious to get at any value when your essential property are cash-burning startups that may be laborious to worth and infrequently destined to fail.
However Tiger, based greater than twenty years in the past, helped pioneer the motion by fund managers that at the moment are invading Silicon Valley and different tech bastions seeking unicorns — they usually’re bringing with them new methods of doing enterprise, akin to taking up leverage that may enhance returns or amplify losses.
“The place you may have new traders crossing into an space like venture capital, they bring about different practices alongside,” stated Josh Lerner, a Harvard Enterprise College professor who makes a speciality of non-public markets. “There’s a lot to be decided on the way it’s going to shake out.”
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Representatives for Tiger International and JPMorgan declined to remark.
Tech swoon
Coleman, 46, and venture-capital chief Scott Shleifer had been among the many first within the sector to see that investing in carefully held tech firms, significantly these in China, may present larger returns than wagers on publicly traded shares.
CB Insights ranked Tiger International as essentially the most energetic enterprise investor final yr, when it raised about $18 billion for its two most up-to-date funds. It made investments in 333 firms, together with 111 within the fourth quarter. Shleifer’s enterprise funds gained 54% final yr and have generated common annual returns of 27% since inception.
Nonetheless, many Tiger investments that went public throughout the previous two years have plunged. They embrace the American depositary receipts of Chinese language tech corporations Agora Inc. and ATRenew Inc., which have misplaced greater than three-quarters of their worth for the reason that center of final yr.
Its stakes in US progress firms akin to Roblox Corp. and Oscar Well being Inc. have additionally languished for the reason that Federal Reserve signaled in November that it could elevate rates of interest extra rapidly than anticipated.
Tiger isn’t the one massive funding agency to deploy asset-based financing, and maybe none makes use of it greater than Masayoshi Son’s SoftBank Group Corp. In December, Softbank’s second Imaginative and prescient Fund borrowed $4 billion by pledging its $40 billion portfolio of stakes in non-public firms to a lending group led by Apollo International Administration Inc.
Asset-based lending, together with margin loans, comprised greater than 40% of Softbank’s $128 billion of debt as of December, in keeping with a Bloomberg Intelligence evaluation.
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Non-public fairness funds have additionally began utilizing NAV loans to make extra investments after exhausting their investor capital and to bolster the steadiness sheets of troubled portfolio firms, stated David Philipp, a companion at Crestline Traders.
Some corporations even use the borrowings to pay dividends to restricted companions, who typically need their cash returned earlier than committing capital to a subsequent fund run by the identical supervisor.
“The place our constructions work is for property which can be much less liquid and don’t match into the prime brokerage leverage fashions,” stated Philipp, whose Fort Value, Texas-based agency raised $1 billion in January to offer NAV loans and different types of financing to cash managers.
Tiger’s debt consists of time period loans that may be elevated in measurement, one of many individuals acquainted with the financing stated. They’re backed by every fund’s portfolio, which may maintain greater than 100 stakes in non-public and public firms.
Just a few Wall Avenue banks, together with JPMorgan and Morgan Stanley, have been prepared to worth and lend in opposition to such giant portfolios of illiquid positions.
“U.S. banks do take a look at this as pretty high-risk,” stated Zachary Barnett, cofounder of Fund Finance Companions. “Your conventional money-center banks don’t like enjoying within the NAV area.”
However which may be altering.
PIP funds
The financing is conservatively underwritten, with mortgage quantities usually equaling 10% to twenty% of the worth of the underlying collateral, one particular person stated. Furthermore, the debt carries rates of interest which can be 3 to six share factors larger than comparable authorities bonds.
Tiger’s Non-public Funding Companions funds could make investments as a lot as 150% of their capital, with among the extra financed via borrowings, in keeping with one of many individuals. Which means the most recent fund, which is anticipated to shut this month with $12 billion of commitments, may technically borrow as a lot $6 billion, though the particular person stated that may be unlikely.
The borrowings allow the PIP funds to take part in subsequent fundraising rounds by non-public firms through which they’ve already invested, the particular person acquainted with the state of affairs stated. Tech startups which have but to generate a lot money stream usually finance their companies by periodically issuing inventory, doubtlessly diluting the stakes of present traders except they signal as much as purchase shares in subsequent choices.
In September, Dan Loeb’s Third Level Traders Ltd. introduced that it had entered right into a $150 million credit score line secured by its offshore fund so as to “make use of gearing” — or add leverage — and paperwork present the mortgage got here from JPMorgan’s structured fairness financing unit.
Till final yr, that unit supplied virtually the entire NAV financing for Tiger’s PIP funds, regulatory filings present.
Because the loans grew bigger, nonetheless, Tiger sought to herald different banks that had been already offering it with prime brokerage companies, the individuals stated.
In June, JPMorgan filed paperwork displaying it could recruit different lenders to assist finance NAV loans to Tiger courting way back to 2017. And when Tiger’s two most up-to-date PIP funds launched final yr, JPMorgan assembled a gaggle of lenders to offer the financing slightly than doing it alone.
